Need to Know: A one-way bet could end in a steep selloff for this commodity

It looks like the great march to 3% for the 10-year Treasury bond yield has been called off, at least for now.

It’s a good thing, then, that investors have plenty to keep them busy this week on the earnings front, with Google kicking off a big week for techs last night, Facebook and Twitter tomorrow, then Amazon Thursday.

But investors aren’t likely to so easily forget how close the 10-year yield came and how it remains in the ballpark of that key level, especially given the huge boost the dollar has gotten as a result. That’s been tough on those who have been making heavy bets that the greenback’s rout, which started in early 2017, will just keep going.

Fresh data from the Commodity Futures Trading Commission, which tracks futures bets on a number of assets, shows bearish bets on the dollar intensified recently — what some would call a desperate gamble.

That brings us to our chart of the day from Jesse Colombo, analyst at Clarity Financial, in a blog post for Real Investment Advice. While the consensus view is for a weak buck, he notes the so-called “smart money” — big hedge funds — are upping their own bullish bets on U.S. Dollar Index futures. The last several times this has happened, he said, the greenback has gone up.

He says the dollar will have to bust out of the so-called triangle pattern, shown in this chart, before the end of the downtrend can truly be declared.

Jesse Colombo

But that leads us to another worry for investors. If the dollar truly starts to bust higher, it could be bad news for crude, as the two assets tend to move inversely, according to Colombo.

“The U.S. dollar’s surge in 2014 and 2015 was the trigger for the violent crude oil bust,” he says, noting that big hedge funds are even more bearish now on crude than they were just before oil popped in 2014.

“While most market participants currently believe that further bearish dollar/bullish commodities action is practically guaranteed, they need to be aware of the tendency for the market to ‘tip over when everyone gets to one side of the boat,’” he says.

The call

U.S. stocks could fall 30% to 40% if markets keep seeing bond repricing, says our call of the day, from Rainer Michael Preiss, executive director at Taurus Wealth Advisor. In an interview with CNBC, he points to a 3% yield on the 10-year U.S. Treasury note as the “line in the sand” that could lead to some readjustment in fixed-income markets.

Preiss says the big worry is that rising bond yields will cause a correction for stocks and corporate debt.

“Don’t forget that we are (at a) late-stage cycle. Everybody has been conditioned to buy the debt. That was the right strategy; it was a bit like the analogy, the narrative, that equities are cheap because bonds are even more mispriced,” says Preiss.

What should investors be doing? If interest rates are rising as parts of the economy slow down, it could get tough for stocks, he says. “That’s why increasingly … it’s important to have a look at portfolio construction and potentially reduce passive ETF exposure.”

The quote

“When I first woke up, I felt finally more normal … [with] a level of confidence as well. Confidence … like finally I’m okay now.” — That was the young unidentified U.S. veteran who just received the world’s first penis and scrotum transplant , courtesy of a team of plastic surgeons and urological surgeons at John Hopkins.

The man, who wished to remain anonymous, sustained the injuries while serving in Afghanistan, and doctors are hopeful he’ll get “near-normal urinary and sexual functions.”

Random reads

Police arrest man suspected of mowing down pedestrians with a van in Toronto, killing 10.

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